The importance of location is as crucial in the real estate industry as it is to entrepreneurs looking for a suitable economic landscape to open a business. Some upstart business professionals put together a checklist of items they’d like from a state that includes low taxes, an adequately trained workforce, and next-generation infrastructure, among others. By that same token, it makes perfect sense to vet states even with thriving economies, and California consistently ranks among the best. If you are preparing to launch a startup, these are the pros and cons of California to consider.
California Possesses Staggering Economic Growth
By the end of 2022, California enjoyed such positive economic growth that it nipped at the heels of Germany. With a $3.598 trillion gross state product, California posted the largest sub-national GDP in the world. It also ranked fifth among national economies, closing the gap with Germany, which stood at number four. Many believe the Golden State will overtake Germany in the next few cycles. That’s a staggering business statistic that translates into potential and profitability.
“California outperforms the U.S. and the rest of the world across many industries. That’s especially relevant with renewable energy, the fastest-growing business in California,” Gov. Gavin Newsom reportedly said. “California’s trajectory is most transparent in the growing divergence between its 379 companies with a market value of at least $1 billion. California technology hardware, media, and software saw sales increase 63 percent, 95 percent, and 115 percent the past three years, boosting market valuations by 184 percent, 54 percent, and 58 percent.”
Its business culture, arguably, stands unrivaled in the U.S. and Silicon Valley is home to the world’s largest and most profitable technology companies in the world. According to Fortune Magazine, 118 or more than 11 percent of all Fortune 1000 corporations are headquartered in California. The lucrative landscape surrounding these enterprises creates substantial opportunities for new organizations to tap into peripheral revenue streams.
It’s important to note that multinational giants typically require support from a wide array of subcontractors and their skilled staff members. These are essential facts about the California workforce you gain access to by opening in California, according to the Bureau of Labor Statistics.
- Education and Health Services: Employment in this sector improved from 2,278,700 to 3,020,600 over the last decade.
- Financial Activities: Employment in this sector ticked up from 781,000 to 846,100 over the last decade.
- Information: Employment in this sector improved from 2,305,800 to 2,912,600 over the last 10 years.
- Professional and Business Services: Employment in this sector rose from 446,000 to 596,300 over the last decade.
- Leisure and Hospitality: Employment in this sector surged from 1,636,800 to 2,007,700 over the last decade.
- Manufacturing: Employment in this industry rose from 1,259,300 to 1,346,900 during the last 10 years.
- Trade, Transportation, and Utilities: Employment in this sector has increased from 2,732,900 to 3,135,800 over the last decade.
Although household-name multinational organizations garner a great deal of attention, the Golden State also has a thriving small and medium-sized business environment. The number of companies with fewer than 500 employees hovered around 4.24 million in 2022. Their ranks have steadily risen from 3.69 million in 2016, according to the Small Business Administration. Today, 99.8 percent of all enterprises in California are considered small or medium-sized operations.
Starting a Business in California
The wealth and statistical economic benefits of starting a business in California make it seem like an absolute must. But there are factors that bring these lofty indicators back to Earth. For instance, its high GDP is balanced by the fact it is the most populated state in the union. Nearly 40 million people live in California, nearly 10 million more than second-ranked Texas, and 17 million more than in Florida. In terms of real GDP per capita, California runs fifth if you include the District of Columbia.
The point is that statistical analysis does not always tell the entire story. But by considering the pros and cons of the following issues, you’ll have a well-rounded idea of whether the Golden State is the right place to start your business venture.
Pros and Cons of Registering a Business in California
California, shall we say, beats to a drum all its own in terms of business regulations. The state has earned a reputation for passing some of the most sweeping progressive labor laws, and environmental regulations, and these can impact registering and operating a company. It’s not unusual to pay a higher cost to register an organization. However, there are pros that may offset the expense, depending on your niche. These are pros that may incentivize forming a business entity in California.
- The state provides high environmental tax incentives for new and existing businesses.
- The state offers low tax rates for small businesses that may vary across counties.
- Shareholders are typically shielded from liability for debts or judgments against a corporation.
- In California, a corporation provides anonymity to owners.
It’s also important to note that California filing fees are lower than in several other states. Like any state, there are also items that company leaders may not find appealing. These are cons associated with opening a startup.
- California levies the highest franchise tax of any state, with a minimum of $800 per operation.
- The state recently enacted the California Revised Uniform Limited Liability Act, which imposes a host of new rules and regulations on businesses.
The state has a law called AB5 that effectively bans independent contractors in a wide range of industries. This means that startups may need to put people on the payroll in areas they would ordinarily outsource in other states. The AB5 law has been something of a thorn in the side of the freight transportation industry.
Pros and Cons Associated with the Cost of Living
It’s no secret that California ranks among the most expensive places to live. A cost of living metric by Best Places that positions that value of a dollar at 100 saw the Golden State far exceed that median at 149. Subcategories such as groceries (105.1), utilities, (102.4), transportation (133.1), and housing (234.8) make living in California more expensive than in many other places.
The cost of housing more than doubled the national average in 2023 at over $733,000. Opening a business means you and your employees will likely become full-time residents. Can your venture generate the salaries to afford it?
Although California ranks among the top 5 most expensive states to live in, residents also enjoy among the highest salaries. Income data indicates that Californians earn the fourth highest salaries, on average, after Massachusetts, New York, and Washington. Larger salaries generally offset the cost of things like groceries, utilities, and transportation, while housing can still be something of a challenge. This issue may result in low- and mid-range earners renting more frequently than purchasing a home.
Pros and Cons of California Taxes
The Pacific Coast state has not necessarily been shy about leveling taxes to fund its massive infrastructure and governmental programs. California has the highest personal income tax, with its wealthiest residents paying 13.3 percent. It uses a graduated system, meaning middle- and low-earners pay far less.
Entrepreneurs can anticipate paying higher corporate taxes as well. According to the Tax Foundation, California imposed the second-highest business taxes in terms of collected dollar amounts in 2021 at $6,325. By contrast, Alaska tapped businesses for the fewest dollars at $1,438.
Although the number may be high, business leaders are tasked with weighing that cost against possible benefits. California has some of the most advanced infrastructure and a port system that brings in more goods and materials than any other state. Adages such as “there’s no such thing as a free lunch” or “you get what you pay for” underscore the seemingly high Golden State tax situation.
Adapting and Overcoming California Business Challenges
Regardless of which state you consider starting a business, there will be differing pros and cons. Registration challenges and regulatory hurdles exist in all 50 states, as well as the District of Columbia. It’s just a matter of adapting and overcoming the in-state bureaucracies.
That being said, many entrepreneurial visionaries consider California an ideal place to start a business. With a robust landscape and economy that rivals all of Germany, businesses are succeeding in the Golden State. That may be the best reason to consider launching a venture in California.
